Bond index inclusion was expected to be a game-changer for India—bringing in billions of dollars from passive global funds. But the excitement has faded, and the reason is simple:
The U.S.–India rate differential is now at a multi-decade low.
Why This Matters
1. Lower rate differential = weaker foreign debt inflows
Global investors look for higher yields when entering emerging markets.
But with U.S. yields staying elevated and Indian government bond yields softening:
- The yield gap between U.S. Treasuries and Indian bonds has narrowed sharply.
- This makes Indian bonds less attractive despite index inclusion.
2. Index inclusion ≠ guaranteed foreign inflows
Being included in a global bond index only gives access to investors.
It does not guarantee that foreign institutional dollars will pour in.
With the rate differential shrinking, even passive funds may keep allocations minimal until yields become more appealing.
3. Market Euphoria Has Turned Realistic
Earlier, expectations were high that index inclusion would trigger large inflows and support the rupee.
But with the current macro setup:
- Inflows may be slower
- Smaller than initially projected
- Highly sensitive to global rate cycles, especially the U.S. Federal Reserve’s trajectory
Bottom Line
A multi-decade low rate differential has taken the shine off India’s bond index inclusion story.
The long-term structural benefits remain intact, but in the near term, yield math—not sentiment—will drive flows.
Stay tuned for more macro insights with CurrencyGyan.
